Three Thoughts for Financial Inclusion Entrepreneurs

I am one of the founders of Coda Payments, a company that makes it possible for customers in emerging markets to make small-value purchases using their pre- or post-paid mobile accounts. I won’t elaborate further on what we do here, as Paul Breloff summarized our business in a previous post on this blog. Instead, I want to write about three lessons we’ve learned since starting Coda in the hope that they will be useful for aspiring entrepreneurs in this space, and for others as they consider the role of startups in financial inclusion.

1. Don’t dance with elephants unless you’re prepared to specialize in it.

The biggest constraint startups face is their size, and the name of the game is to find ways of doing more with less. In financial services, one means to this end is to build a business serving, or partnering with, banks or telcos. But making inroads and striking deals with such players, particularly arrangements that are outside their usual range of experience, is time-consuming and difficult. Since it’s hard for startups to do more than a couple things at the same time, this needs to be either a core competency, or it shouldn’t be an objective at all. In other words, if your strategy entails working with operators or banks, your company won’t need to have a sales organization—it will need to be one.

At Coda, our strategy is unambiguous: to leverage the billing and distribution assets of mobile operators. As such, Coda's co-founder Paul Leishman, and I, spend a huge amount of time recruiting, selling to, and implementing with MNOs. We think this strategy works for us because Paul and I worked with MNOs for years on their payments programs at the GSM Association. This allowed us to build a network of contacts and gave us insights into how operators are organized, what their priorities are, and how decisions get made. Without this network and these insights, we would have started a different company—one that wouldn’t rely on partnerships with big players.

2. Choose regulatory safe harbors, not grey areas.

Startups are horribly risky. VCs are happy if one out of ten of their investments succeed, and of course they’re talking just about the subset of startups that manage to attract venture funding. The odds are even longer in the developing world, where infrastructure, capital, talent, and legal protections can all be in short supply. So the last thing you want to do (or your investors want you to do) is to compound your difficulties by choosing a business model that is vulnerable to regulatory risk. This can be frustrating—many of the most exciting business models in financial services are not yet regulated clearly. But if you want to be successful, leave it to more established players—those that will also be more likely to have clout in the political economy that governs financial-sector policymaking than you do—to push the regulatory envelope.

One of the reasons we started a company in carrier billing is that customers have been using their mobile phones to purchase third-party services and content for many years, so there are clear precedents for how such activities are regulated. We passed on many other opportunities simply because they entailed too much regulatory risk.

3. Make technology your competitive advantage.

Software is eating the world is Marc Andreessen’s memorable phrase about how every industry, from healthcare to travel, is being transformed by software. But it is eating the world of financial services slowly. To be sure, most financial institutions today are intensive users of IT. But they have been slow to adopt the set of technologies, such as the cloud, that make it far cheaper and easier to develop software today than it was ten years ago. And their tendency to buy off-the-shelf solutions from vendors means both that they roll out new technology slowly and that what they do adopt tends not to be differentiated from what their rivals use. All this makes it surprisingly easy for startups with technical DNA to compete with established players on the quality of their products. In the United States, for example, one of the most celebrated fintech startups has built a software “wrapper” for an ordinary bank account offered by an ordinary bank.

Paul and I decided very early on that we needed to own and operate our own transaction-processing platform, and so we co-founded the company with a tremendously talented CTO who could build it from scratch. It has been a pleasure to be part of a process in which we make a product that offers delightful user experiences. It’s not just us, of course—in Kenya, to take just one country as an example, Kopo Kopo, M-KOPA, and Musoni are all startups that are successful in large part because of the excellence of their (software) products. Because when you are being compared with established financial institutions, you’ve got a real shot at creating significant competitive differentiation through technology.